RBC Economics reports Canadian GDP growth softened in late 2025, with its Q4 forecast cut from a 0.5% annualised rise to flat. Real per-capita GDP is still expected to improve gradually into 2026.
Trade-exposed manufacturing remains weak, but the effects on the wider economy are described as limited. Labour market conditions are stabilising and the unemployment rate is trending lower.
Core inflation is above target but easing. These conditions are linked to expectations that the Bank of Canada will keep policy steady.
The Bank of Canada held the overnight rate at 2.25% in January for a second meeting and said the policy rate “remains appropriate” at the bottom of the neutral range. RBC expects the rate to stay at 2.25% through 2026, citing stabilising labour conditions, building fiscal support, and moderating inflation pressures.
RBC also refers to the IEEPA ruling and says the impact on Canada depends on tariff exemptions for CUSMA-compliant trade. Past exemptions have shielded most Canadian exports to the US from IEEPA measures.
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With the Bank of Canada holding its policy rate steady at 2.25%, we see little reason to position for near-term rate surprises. The economy is showing modest growth, and with labour markets stabilizing, the central bank seems comfortable staying on the sidelines. This suggests that volatility in short-term interest rate derivatives, such as BAX futures, should remain suppressed in the coming weeks.
Recent data supports this holding pattern, giving us more conviction in this view. The latest inflation print for January came in at a manageable 2.5%, still above target but continuing its moderating trend from last year’s highs. Furthermore, the January labour report showed the unemployment rate holding at 5.4%, a sign of stability that doesn’t pressure the Bank to act.
This period of calm follows a significant easing cycle that ended in 2025, where rates were cut from the cycle highs seen back in 2023. The flat GDP growth in the final quarter of 2025 was a key factor in ending those cuts. Now, the market has fully priced in this extended pause, and derivative pricing reflects expectations of the 2.25% rate holding through the year.
For options traders, this environment points towards strategies that benefit from low volatility, such as selling straddles or strangles on interest rate or currency products. Implied volatility on Canadian dollar options has already fallen significantly since last year, reflecting the market’s belief that the BoC will not be a major driver of price action. Any unexpected strength in economic data would be the primary risk to these positions.
Given the stable domestic interest rate outlook, the Canadian dollar’s value will likely be driven more by external factors. Traders should watch oil prices, specifically the price of Western Canadian Select, and any shifts in global risk sentiment. The ongoing health of the U.S. economy is also critical, as our trade-exposed manufacturing sectors remain sensitive to American demand, even with CUSMA exemptions shielding us from major trade disruptions.
